There is no doubt that money can be made by owning shares of unprofitable companies. For exemple, Lake resources ( ASX: LKE ) has seen its share price rise 973% over the past year, delighting many shareholders. Still, only an idiot would ignore the risk that a loss-making company would burn up its cash too quickly.
Given the strong performance of its share price, we believe it is worth asking Lake Resources shareholders if its cash consumption is of concern. In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. Let’s start with a review of the company’s cash flow, relative to its cash consumption.
When could Lake Resources run out of money?
A company’s cash flow track is calculated by dividing its cash reserve by its cash consumption. As of June 2021, Lake Resources had A $ 26 million in cash and was debt free. Importantly, his cash consumption was AU $ 3.9 million in the past twelve months. So he had a cash flow trail of around 6.7 years as of June 2021. While this is only a measure of his cash consumption situation, it certainly gives us the impression that holders have nothing to fear. You can see how his cash balance has changed over time in the image below.
How does Lake Resources’ cash consumption change over time?
Lake Resources has not recorded any revenue in the past year, indicating that it is a start-up company that continues to expand its business. Nonetheless, we can still examine its cash-consuming trajectory as part of our assessment of its cash-consuming situation. While it hardly gives a picture of imminent growth, the fact that it has reduced its cash consumption by 43% in the last year suggests a certain caution. Obviously, however, the crucial factor is whether the company will expand its business in the future.
Can Lake Resources easily raise more money?
Even though it recently reduced its cash consumption, shareholders should still consider how easy it would be for Lake Resources to raise more cash in the future. Businesses can raise capital through debt or equity. Typically, a company itself will sell new stocks to raise funds and drive growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Lake Resources’ cash consumption of AU $ 3.9 million represents approximately 0.6% of its market capitalization of AU $ 648 million. This means that he could easily issue a few stocks to fund more growth and may well be able to borrow more cheaply.
So, should we be worried about Lake Resources’ silver consumption?
As you can probably see by now, we’re not too worried about Lake Resources’ cash consumption. In particular, we believe that its cash flow track is proof that the company has good control over its spending. And even its reduction in cash consumption was very encouraging. After looking at a range of factors in this article, we’re pretty relaxed about its consumption of cash, as the company appears to be in a good position to continue funding its growth. On another note, Lake Resources has 4 warning signs (and 2 which are a little unpleasant) we think you should know.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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